apart or die - - transforming your supply chain into an adaptive business network-claus heinrich
TRANSCRIPT
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ADAPT
OR DIE
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ADAPTOR DIE
Transforming Your Supply Chain into anAdaptive Business Network
CLAUS HEINRICHwith Bob Betts
John Wiley & Sons, Inc.
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Copyright 2003 by SAP AG. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.Published simultaneously in Canada.
No part of this publication may be reproduced, stored in a retrieval system, ortransmitted in any form or by any means, electronic, mechanical, photocopying,recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the1976 United States Copyright Act, without either the prior written permission of thePublisher, or authorization through payment of the appropriate per-copy fee to the
Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923,(978) 750-8400, fax (978) 750-4470, or on the web at www.copyright.com. Requests tothe Publisher for permission should be addressed to the Permissions Department,
John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011,fax (201) 748-6008, e-mail: [email protected].
Limit of Liability/Disclaimer of Warranty: While the publisher and author have usedtheir best efforts in preparing this book, they make no representations or warranties
with respect to the accuracy or completeness of the contents of this book andspecifically disclaim any implied warranties of merchantability or fitness for aparticular purpose. No warranty may be created or extended by sales representatives or
written sales materials. The advice and strategies contained herein may not be suitablefor your situation. The publisher is not engaged in rendering professional serv ices, andyou should consult a professional where appropriate. Neither the publisher nor authorshall be liable for any loss of prof it or any other commercial damages, including butnot limited to special, incidental, consequential, or other damages.
For general information on our other products and serv ices please contact ourCustomer Care Department within the U.S. at (800) 762-2974, outside the UnitedStates at (317) 572-3993 or fax (317) 572- 4002.
Wiley also publishes its books in a variety of electronic formats. Some content thatappears in pr int may not be avai lable in electronic books. For more information about
Library of Congress Cataloging- in-Publication Data:
Heinrich, Claus.Adapt or die : transforming your supply chain into an adaptive
business network / Claus Heinrich.p. cm.
Includes bibl iographical references and index.ISBN 0- 471-26543- 8 (CLOTH : alk. paper)
1. Industrial procurement. 2. Business networks. I. Title.HD39.5 .B485 2002658.72dc21
2002013140
Printed in the United States of America.
10 9 8 7 6 5 4 3 2 1
Wiley products, visit our web site at www.wiley.com.
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New technologies for supply chain management and flexible manufacturing
imply that businesses can perceive imbalances in inventories at a very early
stagevirtually in real timeand can cut production promptly in response to
the developing signs of unintended inventory building.
-Alan Greenspan, in testimony to the U.S. Senate
Committee on Banking, Housing, and
Urban Affairs, February 13, 2001
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ix
A c k n o w l e d g m e n t s
Iwould like to acknowledge and thank my collaborator, Bob Betts. With-
out his insight, research, and dedication, this book would not have
been possible. His many years of operational experience contributed so
much to the vision that is outlined in this book.
Many others at SAP contributed to this project and deserve great
thanks: Ed Brice, Bob Cummings, Shoumen Datta, Albrecht Diener,
J. Harris, Chuck Lawrence, Alex Renz, Wolfgang Runge, Ralph Schnei-
der, Diane Tracy, Jim Vrieling, and Karen Zwissler.I would also like to thank our agent Kelli Jerome and the many tal-
ented people at John Wiley & Sons, especially our editor Matthew Holt
and publisher Larry Alexander. Also invaluable were Marketing Managers
Laurie Harting and Michael Patterson, Production Managers Maureen
Drexel and Linda Indig, and Susan Alfieri, Tamara Hummel, Joe Mar-
chetti, Dean Karrel, George Stanley, and the Wiley salesforce.
We are also grateful to many accomplished people outside of SAP for
their excellent review comments. Without them lending their collectiveexperience and time, this book would not have the relevance to real busi-
ness that was wished for. This includes David Simchi-Levi of MIT, Hubert
Osterle and Elgar Fleisch of the University of St. Gallen, Ray Lane of
Kleiner Perkins Caufeild & Byers, Jake Barr of Procter and Gamble, Fred
Kuglin of CGE&Y, Fred Ricer Jr. of PwC Consulting, and Philip Kaminsky
of UC Berkeley.
Finally, without the energy and style of our additional writing col-
laborators, Andrea Carlos, Bil l McRae, and Corey Grice, the text would
not have taken shape. Also I would like to thank Larry Heikell for his
help with editing, Aaran Riddle and Anna Skinner for their help with re-
search and resource material, and Johanna Weseman for her logistical
support.
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TEAMFLY
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xi
C o n t e n t s
Introduction: . . . . . . . . . . . . . . . . . . . . . . . . . . xiii
When Bad Things Happen to Good Companies
Chapter 1: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
In Search of the Holy Grail
Chapter 2: . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Seeking Partners for Greater Competit ive Advantage
Chapter 3: . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
The Adaptive Business Network Vision
Chapter 4: . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Roles and Responsibilities within the Network
Chapter 5: . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
Preparing for an Adaptive Business Network
Chapter 6: . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
Step OneVisibility
Chapter 7: . . . . . . . . . . . . . . . . . . . . . . . . . . . 105
Step TwoCommunity
Chapter 8: . . . . . . . . . . . . . . . . . . . . . . . . . . . 121
Step ThreeCollaboration
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xii Contents
Chapter 9: . . . . . . . . . . . . . . . . . . . . . . . . . . . 141
Step FourAdaptability
Chapter 10: . . . . . . . . . . . . . . . . . . . . . . . . . . 167
The Adaptive Business Network in Practice
Chapter 11: . . . . . . . . . . . . . . . . . . . . . . . . . . 187
Future Implications of Adaptive Business Networks
Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . .205
Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .217
Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . .221
About the Author . . . . . . . . . . . . . . . . . . . . . .225
Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .227
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xiii
I n t r o d u c t i o n
When Bad Things Happen to
Good Companies
Bad is never good until worse happens.
Danish proverb
Youre the CEO of a mid-size company. Until recently, your prod-ucts were making customers happy, your revenues were growing ata steady pace, and the financial community was satisfied with your per-
formance.
But lately your widgets arent f lying off the shelves the way they used
to. Revenue is fal ling, earnings -per-share is being squeezed, and your cus-
tomers are growing increasingly dissatisf ied with your products and sup-
port. You need to get to the bottom of this, and quickly, before thesituation worsens.
You gather your leadership team into a conference room, and one by
one you point your finger at each of your top executives.
Whats your solution? you ask.
We must significantly slow our rate of spending, says the chief fi-
nancial off icer.
We should eliminate some of the competition by acquiring our No.
4 competitor, offers the chief operating off icer.
We need to upgrade our technology and business processes to im-
prove eff iciency, says the chief information off icer.
We should upgrade our equipment to improve our production con-
sistency and quality, says the vice president of engineering.
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xiv Introduction
We need to discount our existing inventory to maintain our market
share, the vice president of sales interjects.
We could always just hire more customer serv ice reps, quips the vicepresident of customer service.
After everyone goes back to work, you sit down, realizing the meet-
ing was a f lop. Cost cutting, acquisitions, technology and equipment up-
grades, discountsthese are the same types of contradictory solutions
youve heard in the past. The fact is that youve tried all of these solutions
at one point or another. Your company was doing well for a stretch in the
hyper-economy of the late 1990s, but here it is at the start of the twenty-
first century, and once again, youre falling behind. To thrive, you know
you must break the pattern of cost cutt ing, layoffs, and similar measures
when business is bad, only to have those same measures come back to
haunt you when the company is rejuvenated by an improving economy or
other market variable. But what can you do?
The State of Business Today
If this dilemma sounds familiar, you are not alone. Despite the efforts by
companies over the past two decades to prosper and maintain a compet-
itive edge, business performance is not what it should be. Consider the
following:
Profits are under pressure. In 2001, the profits of U.S.-based, nonfi-
nancial companies were at their lowest level since 1995, off $1 bil lion
from the previous year.1
Companies continue to accumulate costly inventory. Despite inventory-
cutting initiat ives in recent years, factory inventories continue to grow
steadily as the economy expands. From 1997 to 2000, real inventory
levels in U.S. manufacturing increased quarter on quarter from
$436.8 billion to $490.3 billionan increase of $53.5 billion, or 12
percent, in three years.2
Earnings per share are declining. Earnings per share of S&P 500 com-
panies fell 50 percent in the fourth quarter of 2001 compared with
the previous year, the sharpest decline in over 50 years.3
The return on assets (ROA) is declining. For mature companies, there
has been a significant drop in ROA from almost 8 percent in the
1950s to only 3 percent in the 1990s.4
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Introduction xv
Market capital values are declining. From 2000 to 2001, the total mar-
ket capitalization for the Forbes Market Value 500, composed of
Americas largest public companies, dropped 20.5 percent. In this 12-month period, Cisco Systems, Microsoft, Intel, Lucent Technologies,
and Oracle lost more than $1 trillion in total value. The following
year, the carnage continued. In 2001, the aggregate net income of the
500 most profitable U.S. firms declined 23 percent.5
Expecting the Unexpected
Past attempts to remedy these problems have provided some incremental
gains, yet the problems persist. The cycle continues. Companies have
spent hundreds of millions of dollars on information technology. Theyve
followed advice from the best business leaders and consultants, and stil l
the cycle repeats itself.
Its true for businesses large and small. Businesses today keep apply-
ing the same old solutions to their problems. And they end up repeating
these up-and-down cycles rather than planning for and performing well
under bad conditionsand putting themselves in a position to exploitthe good times.
Today the problems facing businesses have shifted again. The rules of
business have changed again. And companies globally are struggling to
adapt quickly enough to exploit the new market conditions . . . again.
Waiting outside the walls of every company are the shocks of unfore-
seen circumstances, be they from economic, regulatory, or geopolitical
impacts. Your main competitor may unveil a new technology that renders
your product obsolete. A new study might be released that spurs customerdemand for a different product from the one youre producing. Or the
economy could go into recession, presenting you with immediate prob-
lems on both the demand and supply sides of your business.
The reality is that the predictable cycles your business may have once
known will never return. Its as if a rock has been tossed into a pool of pre-
viously still water. The ripples begin to roil the waters. Then there is a sec-
ond rock, and then another and another. The once calm waters churn w ith
motion. And the rocks and shocks keep coming. Business today is in much
the same state. The shocks keep coming at an ever-increasing pace. Busi-
ness as usual is no longer usual. The new business reality is constant change.
To succeed in the twenty-first century economy, companies need to
adapt to a new environment in which everything is in motion. Transforming
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xvi Introduction
your business to succeed in this rapidly accelerating environment is not
optional. In short, its adapt or die.
A New Vision for Business
Businesses today need a new way of operating that gives them the flexi-
bility to respond quickly to unexpected changes. They need a new oper-
ating model that enables them to adapt to difficult economic conditions,
while also putting them in a position to exploit a more favorable econ-
omy. And they need sustainable opportunities for increasing revenue, re-
ducing costs, and making the most out of what their company does best.
This book is about a new method of doing business aimed at helping
companies achieve these goals. Called the adaptive business network, this
new business model joins companies into an adaptable and flexible set of
business relationships (see Figure I.1). By linking companies through
Figure I.1 Critical Business Elements of the Adaptive
Business Network
All businesses today have these four elements, but man-
age them with varying degrees of effectiveness.
Plan
RespondRespond
PlanPlan
SenseSense
ExecuteExecute
AdaptiveAdaptive
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Introduction xvii
standard business processes and common technology, the adaptive busi-
ness network allows them to work together as a loose network of partners.
Working together with other businesses in the network, each company isable to respond more swiftly to changing market conditions than it could
on its own. Companies within the network remain autonomous, but are
able to leverage the networks cumulative ability to:
Plan and anticipate demand and supply.
Execute plans efficiently and effectively.
Sense events that affect the plans as those events occur, and analyze
them for impact. Respond to and learn from ever-changing business conditions.
The adaptive business network is designed to help businesses quickly
respond to changing market conditions by capitalizing on the strengths
of operating units w ithin the company and trading partners outside the
company. It is a model based on mutual goal settingand not limited to
the traditional buyer-seller relationship that exists today between most
trading partners.Companies within the adaptive business network are able to react
quickly to changing customer demands by efficiently exchanging and
responding to information, to the benefit of all participating com-
panies. In addition, new partners can be added to the network quickly
What Is an Adaptive
Business Network?
Definitions convey the fundamental character of words, phrases, or
terms. By breaking the concept of the adaptive business network down
to its base vocabulary construction, a clearer understanding of its ca-
pabilities and goals can be achieved.
Adaptive (adjective)The ability to rapidly anticipate and/or respond
to changing environmental conditions.
Business (noun)Commercial, industr ial, and professional dealingsas well as the volume and amount of commercial trade.
Network (noun)An interconnected or interrelated chain, group, or
system that enables communication among all part icipants.
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xviii Introduction
and inexpensively as market conditions change and new business op-
portunities arise.
Participation in an adaptive business network puts companies in aposition to remain flexible, resourceful, and profitable in a constantly
changing business environment. It allows businesses to meet the increas-
ing demands of consumers who expect high-quality, personalized prod-
ucts designed and delivered in ever-shortening time windows, and to
attract new customers and sales based on the ability to meet those chang-
ing consumer needs. The network helps reduce costs by streamlining
processes to focus on what each participating company does best, and it
allows all participants to collaborate dynamically with their partners to
produce new and innovative products and services.
In short, the adaptive business network provides new opportunities to:
Increase profit margins.
Set appropriate levels for inventory.
Accelerate cash-to-cash cycles.
Increase earnings per share.
Improve the effectiveness of corporate expenditures.
Capture a greater return on assets.
A Matter of Survival
The adaptive business network is not intended to help companies improve
their manufacturing techniques. Instead its aim is to help reduce the
everyday bottlenecks of working with suppliers and customers. It greatlyreduces the time delays that occur, for example, when relaying informa-
tion about customer purchases to affected companies along the supply
chain. In addition, it dramatically reduces the slowdowns that arise when
coordinating with other companies to f ill customer orders.
Nor is the adaptive business network a pricing-based scheme in which
companies within a network jointly set prices. By taking a collaborative
approach to managing costs in response to changing market conditions,
companies that participate in an adaptive business network will achieve
greater profits than they could by operating in isolation. However, each
business continues to operate as an autonomous entity. Revenue sharing
is possible but it is not a pr imary objective of the network.
Finally, the adaptive business network is not another budget-bursting
IT project. Rather, its primary aim is to help companies adopt more
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Introduction xix
effective business processes for working with their partners so that each
participant achieves greater advantage than is possible by operating
alone. Chances are good that your company already owns most of the tech-nical infrastructure necessary to begin building an adaptive business net-
work. In fact, adaptive business networksbased on the tr ied and tested
fundamentals of effective business processeswill allow companies to
build even more value from exist ing investments in IT and other business
initiatives.
An adaptive business network is a strategy for entire companies and
their partners, including their production, sales, operations, logist ics, cus-
tomer service, and purchasing teams. It is not a project that any individ-
ual company or partner can take on in isolation. Companies must
undertake this effort cooperatively.
Participating in an adaptive business network requires a major shift
in the way companies view their business and their trading partners. First,
it requires moving from tradit ional supplier and customer relationships
into genuine partnerships based on collaborative goal setting.
Moreover, the move to an adaptive business network enables partici-
pants to adopt standardized business processes, new measurement sys-
tems, and toolkits that ensure quality and success. An adaptive businessnetwork will enable partner companies to develop a business foundation
based on measurable, sustainable, and tangible results.
For most companies, moving to an adaptive business network will
become a matter of survival. Companies that quickly embrace this new
operating model will be the winners well into the twenty-first century.
They will quickly discover new revenue opportunities and cost cutting
measures, and will ultimately become more nimble, focused, and com-
petitive. More agile companies that can deliver products and servicesfaster will pass businesses that are slow to respond. On the other hand,
companies that do not move on the opportunity to enhance their orga-
nizational agility w ill watch their market share decrease and their prof-
its fall. The inability to respond to rapidly changing market conditions
will undermine their economic viability.
What You Will Learn from Reading This Book
The concepts in this book apply to multiple industries and roles within
companies. For companies in mature industries, Adapt or Dieprovides the
opportunity to look forward while learning from the past. For companies
in new or emerging industries, this book offers a road map for success. An
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xx Introduction
adaptive business network can provide real benefits for any company,
whether it is in the manufacturing, retail, or service sector.
The adaptive business network must be taught, sponsored, andlearned both within and among participating organizations. Such net-
works emphasize peer-to-peer communication, which means that every-
one involved in the business processes has an important role to play. This
book is essential reading material for all employees who want to con-
tribute to making their company sustainable and competitive into the
twenty-first century.
This book will help companies understand the vision of adaptive busi-
ness networks and prepare businesses for the opportunit ies such networks
will provide. The first chapters describe some of the common problems
businesses face today and examine existing models for working with part-
ners. The book then turns to the vision of the adaptive business network
and how this business model can help companies solve many of those key
problems. The second part of the book discusses how to prepare for an
adaptive business network and describes how to move to this way of doing
business in four, concrete steps. Finally, the last chapters of the book ex-
plain how the adaptive business network can work today, and offer a view
for how it wil l work in the future.After reading this book, you will understand how such networks op-
erate, the strategic advantages they offer, what changes your company
needs to make to move to an adaptive business network, and what tech-
nological requirements are demanded to make the transit ion a success. In
short, you as a businessperson will learn what you can do to realign your
company, your business practices, and your workforce to remain compet-
itive in the twenty-f irst century economy.
TEAMFLY
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1
C h a p t e r O n e
In Search of the Holy Grail
Make voyages. Attempt them. Theres nothing else.
Tennessee Williams
Its a simple fact: The rules of business have changed.In the New Economy, its all about speed and service. With todaysinstantaneous availability of information, new cultural trends can takehold globally w ithin weeksand fade just as rapidly. With technological
advances occurring at such a pace, new products quickly gain in popu-
larity, only to be replaced by more advanced gadgets.
Whats more, customers are unwilling to settle for mass-produced
items and plain-vanilla services. They want specialized products in the
size, color, and shape they prefer. They expect these products to show up
at the exact t ime and place they need them. To keep up, companies must
anticipate changing market conditions and produce a greater variety ofcustomized products in the rapid time frames customers expect.
The challenge for business has always been to get the right products
and services to the customer at the right t ime and at the right price. Its
an ever-greater challenge with todays accelerated pace. Corporations
face a whirlwind of change, highly variable demand, and shifting eco-
nomic, geographic, and political inf luences. Businesses no longer have an
option: They must adapt to survive.
What happened during the dot-com crash to Cisco Systems, the lead-
ing supplier of telecommunications equipment and Internet routing in-
frastructure, provides a good example of the importance of being f lexible
as market conditions change. When business was booming in the 1990s,
Cisco signed long-term contracts with suppliers committing to inventory
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2 Adapt or Die
and production capacities months in advance. This allowed Cisco to
speed shipments of products to customers and maintain profitability.
The approach worked well when times were good and sales were
strong. But when the economy started to slow and many of the start-up
telecommunications companies and Internet businesses Cisco served went
out of business, the company suddenly found its warehouses full of obso-
lete routers and other networking equipment, with payments due on con-
tracted capacity commitments. Cisco suddenly became painfully aware
of the need to quickly adapt to anticipate potential market shifts. Once
they occurred, the company lacked the ability to respond to them in a
timely fashion.
Shrinking Shelf Lives
Over the years, everyday consumer products and services havechanged to accommodate the rapidly changing nature of people and
their growing expectations. Today, consumers have a broader range of
wants and are less willing to wait for them. A look at childrens toys
and music recording media provide cases in point.
Toys Lose Their Luster
In 1959, Mattel introduced the Barbie Doll, and more than 40 years
later, it is st ill popular. Yet, toys introduced on the market today mayhave a shelf life of a couple of years, if that. There are Tamagotchi
games, Beanie Babies, and Cabbage Patch Kids dolls. There are Star
Wars and Power Ranger action figures and Harry Potter toys
spawned by movies and books. There are Spice Girl dolls generated
by the rock group.
Music Technology Quickly Advances
From the 1940s to the 1980s, teenagers bought LP recordings of their
favorite music. Yet, todays teenagers will likely replace their music
recording collections several times to keep up with advancing tech-
nology. The 33-rpm record, f irst introduced in 1948, was the leading
audio storage technology until the compact disc surpassed it in the
late 1980s. However, today MP3 f iles downloadable from the Internet
are already superseding the CD. If the same pattern continues, MP3
will have an even shorter life span as its replaced by even more ad-
vanced audio recording technology.
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In Search of the Holy Grail 3
This inability to comprehend what was happening and respond
quickly cost the company dearly. Ciscos revenues dropped 30 percent in
the first quarter of 2001 over the previous three months, and the com-pany announced it would lay off 8,500 workers and wr ite off $2.5 bil lion
in excess inventory.1
The situation wasnt unique to Cisco. Many high-tech companies
were caught off guard by the dot-com failures. Although market changes
will always be difficult to predict, companies can no longer afford to
run their businesses assuming that market conditions wont change or
A Haze over Hayes Modems*
When Dennis C. Hayes, the father of the personal computer modem,
first developed the device in 1977, he had no idea his popular inven-
tion would spawn a company that would ultimately collapse due to its
inability to adapt to market changes.
Hayes Corp., originally D.C. Hayes Associates Inc., was the pre-
mier maker of computer modems through the 1980s and into the
1990s. The company established an industry standard for modem
commands and relished in its dominance over a market that saw mostother modem makers label their products as Hayes compatible.
Personal problems and a prior bankruptcy filing distracted the
founder and his company, causing Hayes Corp. to stumble. Analysts
and industry experts say Hayes was slow to capitalize on the upgrade
to 56kbps modems just as overseas sales slipped due to the Asian eco-
nomic crisis.
Suddenly, Hayes had trouble competing with equivalent models
from U.S. Robotics, 3Com, and other modem makers. Meanwhile,modems began to be bundled with PCs, which, coupled with compe-
tit ion from low-cost Asian manufacturers, turned the dial-up modem
into a commodity.
By then, Hayes had overproduced its modems, leading to excess
inventory and the eventual halting of manufacturing shifts, worker
layoffs, and a second Chapter 11 bankruptcy filing in 1998. Hayes
failed to recognize the shifting market, overproduced its products,
and couldnt sell its excess inventory. Hayes failed to adapt, and the
company died.
* The Great Idea Finder, Dennis C. Hayes (October 30, 2001), htt p://www.ideafinder.com/history/inventors/hayes.htm.
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4 Adapt or Die
will change at the same pace as yesteryear. To play by the new rules of
todays fast-moving economy, businesses need mechanisms to allow them
to swiftly react and change directioneven when they cannot foreseewhat lies ahead.
The Current Business Climate
Today, businesses face a number of key challenges:
Globalization Demands Ever -Quicker Response Times. For most com-panies, it is no longer sufficient to have an international presence
with stand-alone bureaus in multiple countr ies. A companys oper-
ations, products, and employees must now be coordinated globally
yet enable local operators to react to local market conditions on a
local basis. The complexity of operating on a global scale requires
that organizations have the infrastructure in place to follow the
sun 24 hours a day, seven days a week, worldwide. Companies are
doing business with new partners in unfamiliar languages and dis-tant time zones. They are employing workers in different cultures
with different work habits and legal protections. They are competing
with companies, products, and ways of doing business that may be
completely unfamiliar. And they are branching into new and unfa-
miliar markets. Meeting these challenges requires that businesses
respond quickly and communicate instantaneously across all their
operations worldwide.
Industrial Production Capacity Exceeds Demand. Improvements tomanufacturing processes have resulted in a situation where many
industries now produce more goods than the economy has the ca-
pacity to consume. Moreover, the speed at which companies can add
new production capacity outpaces the speed at which new markets
develop. As a result, companies are increasingly f inding themselves
in a position where they cannot sell enough products to keep ahead
of working capital, additionally, these companies look for ways to
market the excess capacity through collaborative activities with
companies that may require additional capacity. To thrive in this en-
vironment, companies must identify new, creative opportunities to
market their products.
Working Capital Is Increasingly Limited. The expectations of capi-
tal lending institutions have changed, creating a more competitive
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In Search of the Holy Grail 5
environment for access to working capital. Today, institut ions are fo-
cused on earnings per share and price-and-earnings ratios (P&Es),
and prefer sustained, quick-turnaround returns over long-term in-vestments. Companies are forced first to fight for capital, and then to
focus on business practices that stress short-term performance in an
effort to deliver positive quarterly results, even if these actions are
not in the best interest of the long-term viability and health of the
company. Companies need to find ways to borrow less working capi-
tal and use it more efficiently.
Consumers Have Higher Expectations Than Ever Before. Consumers
have become accustomed to getting what they want, the way they wantit, r ight here, right now. Mass -produced goods and services no longer
suff ice in a climate where consumers increasingly expect customized
goods and services to be tailored to their unique taste. For instance,
cable TV brings in hundreds of channels 24 hours a day. But even so,
consumers are increasingly turning to digital recording devices like
TiVo, which allow viewers to personalize their cable programming
into their own channels. For example, the machine can be pro-
grammed to record only Star Trek reruns, Italian soccer games or all
the films in a given week that star Audrey Hepburn.
But its not just entertainment. Consumer expectations are higher
than ever across a broad spectrum of industries. For example, 20 years
ago travel by airplane was expensive, time-consuming to arrange and re-
str icted mostly to well-dressed business travelers. Today, nearly everyone
can af ford to f ly, and customers instead have turned to complaining about
the food, how long it takes to reach their destination, and how crowded
the planes are. Today if customers dont find the price they want, or theflexibility in layover stops and flight times, they frequently will seek out
another competitor.
These factorsincreasing globalization, excess capacity, reduced
access to capital, and higher customer expectationspresent new chal-
lenges for business. To meet these challenges, companies need to be
more adaptable and flexible than ever before. They need to develop
quick response times on a global basis. They need to develop new mar-
kets for their products and borrow working capital more efficiently. They
need to adapt to keep up with their competitors and to respond to
changes in customer demand. In the New Economy, speed and variety
are key. Although some companies have made str ides in meeting grow-
ing expectations, many businesses are struggling to keep up with the
pace (see Figure 1.1).
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6 Adapt or Die
The Same Old Response
In response to these changing business dynamics, many organizationshave tried to either grow from within as vertically integrated companies
or assemble smaller companies into massive corporate conglomerates.
Management teams continue to focus on a variety of business eff iciency
initiatives that are confined to fixing problems solely within the four walls
of their company. Some have sought mergers and acquisitions or other eq-
uity vehicles such as joint ventures as the best route for adapting to
changes in the business environment.
These attempts at reaching the Holy Grail of business most often fal l
short of this goal on one account: They dont provide the flexibility that
organizations need to succeed in todays fast-moving economy. Companies
keep paving the same stretch of road again and again, hoping the new as-
phalt will make their journey more comfortable (Figure 1.2). As it turns
Figure 1.1 Moores Law
More than 25 years ago, Intel co-founder Gordon Moore
predicted that the number of transistors on a micro-
processor would double approximately every 18 months.
That prediction, which still holds true today, demon-
strates the rapid pace of technological advances that
has occurred over the past 25 years. To keep up and
avoid being passed by their competitors, companies must
create more products and get them to market faster.
Reprinted by permission of Intel Corporation, Copyright
Intel Corporation.
1000
10,000
100,000
1,000,000
10,000,000
100,000,000
Moores Law
4004
Pentium Processor
8086
80088080
286
Pentium II Processor
Pentium III ProcessorPentium 4 Processor
486TM DX Processor
386TM Processor
transistors
1970 1975 1980 1985 1990 1995 2000
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In Search of the Holy Grail 7
out, the shortest route is often somewhere else entirely. The problems haveshifted, and the old rules no longer apply.
Whats needed is a new approach that provides the f lexibility required
to adapt to the rapid pace of todays business world, and extends beyond
the companys walls. In the New Economy, a companys success no longer
depends on how eff iciently it operates in isolation, but rather on its abil-
ity to form flexible interdependent relationships with its partners, both
customers and all suppliers.
Keeping Everything Under One Roof
The classic vertically integrated company owns and operates most or all of
the elements of its supply and distribution system. It is usually a collection
Figure 1.2 The Winding Road of Progress
Companies frequently strive to improve their business
processes by simply doing them faster, cheaper, and bet-
ter. In the above example, the same stretch of road is first
covered on foot, then by horse, then by automobile, when,
in reality, the fastest and most direct route may be to take
an entirely different road of transport. Businesses often
follow the same indirect path, committing the same mis-
takes as in the past, when there may be an entirely differ-
ent, faster and more direct way of doing things.
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8 Adapt or Die
of smaller divisions and wholly-owned subsidiaries operated as a single
company. Each of these is responsible for producing a component, a prod-
uct, or a service that goes into the finished offering of the larger com-pany. Many companies are managed as top-down hierarchical structures.
Management decisions are passed down the authority ladder to the com-
panys operation level (Figure 1.3).
A wood products company such as Weyerhaeuser Co. provides a good
example of a vertically integrated company. Weyerhaeuser controls a sup-
ply chain that literally goes from dirt to consumer, and it owns almost all
of the component industries in between. As of December 31, 2000, the
company owned or was leasing 38 million acres of woodland in the United
States and Canada.2 From this land, t imber is harvested and shipped on
Weyerhaeuser-owned logging trucks to Weyerhaeuser lumber or pulp
mills. The resulting lumber or paper is shipped, on Weyerhaeuser trucks,
to distr ibutors or to a Weyerhaeuser building site. Weyerhaeuser also owns
and operates a real estate and land development company, which spe-
cializes, unsurprisingly, in building wooden houses.
On the other hand, a conglomerate is a centralized corporation that
acts something like a holding company. It comprises independent com-
panies managed as stand-alone entities, though the central corporationprovides some direction and strategy and, in some cases, a unifying brand.
Philip Morris Cos. Inc., a multinational tobacco products company, is
a conglomerate. In addition to making cigarettes, Philip Morris owns a
stable of prominent food and beverage companiesincluding Kraft
Foods, makers of Kool-Aid, Oreos, and other confections, and Miller Brew-
ing Co., makers of Miller beerwhich are managed as distinct brands.
Philip Morris remains the silent owner, while the companies are allowed
to pursue their own marketing opportunities.A conglomerate like Philip Morris is similar to a vertical company like
Weyerhaeuser in that they are both hierarchically integrated, inherently
slow to respond, and normalize on the least radical thought. Companies of
all t ypes, whether they are like Weyerhaeuser or Philip Morris, need to ad-
just their structure so they can adapt to ever changing market conditions.
Historically, the business strategy of keeping everything under one
roof was a competitive choice as companies sought to attain crit ical mass.
In a time when access to resources and availability of distribution networks
were a problem, the vertically integrated company and the conglomerate
were the most efficient operating structures. The strategy allowed com-
panies to maintain control over all facets of supply and distribution re-
lated to their products. Companies were able to increase their reach by
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In Search of the Holy Grail 9
Figure 1.3 Decision Making in Vertical Companies
The vertical chain of command in many companies leads to
critical delays in the flow of information and decision-
making processes when problems arise. Information is
passed up the corporate ladder to decision makers and
upper executives before it can be acted on, leading com-
panies to use time and resources inefficiently while fail-
ing to empower employees.
CEO
VicePresident
Director
UpperManagement
Management
CustomerService
CEO
VicePresident
Director
UpperManagement
Management
Purchasing
Start
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10 Adapt or Die
expanding to provide an entire supply chains worth of goods and ser-
vices. Because the companies owned all the units within the supply chain,
they could control where raw materials came from and how products weredelivered to the consumer. Owning everything also gave them close over-
sight of costs and allowed them to maintain a consistent level of quality,
which in turn made it possible to develop a solid reputation for their
product brands.
Today, however, this is an expensive, inefficient, and risky way of at-
taining corporate reach. Companies tend to lose focus, and often spread
themselves too thin as they attempt to do everything from within their
own four walls. Even though it remains an enduringly popular way to op-
erate, in the fast-moving electronic economy, having everything under
one roof has proved cumbersome and unwieldy.
As conglomerates and vertically-oriented companies grow, they slow
down. They lose the ability to move quickly and strategically because their
structure is built to withstand external market pressures and has a hier-
archical decision-making process. Anything that falls outside of the dele-
gation hierarchy is dealt with as an exception. In an effort to be diligent,
committees are formed, task forces are structured, and due diligence is
performed until a critical mass of managers and executives believe theyhave the information necessary to make a decision. This process, by its
very nature, is slow and makes it difficult to adapt to rapidly changing
market conditions.
In addition, these companies often duplicate many of their internal
operational functions. In some cases, costly operational roles such as
human resources and financials are even duplicated from division to di-
vision, greatly inflating company-wide overhead. Similarly, the manage-
ment teams of individual divisions eventually become hierarchicalbureaucracies, inevitably slowing the pace of business and leading to
higher overhead.
Once these hierarchies form, each operational unit tends to be man-
aged with an eye toward its own profitability. Its called suboptimization
the process of ensuring ones business unit or subsidiary meets its goal
despite the impact on the companys best interest. Its such a part of busi-
ness today that internal bonus and incentive programs often offer rewards
for business divisions to achieve levels of production that, in fact, run con-
trary to the companys larger goals. The goals may not be sufficiently
aligned to variable demand and producing more units than the business
is able to absorb might bring healthy bonuses to a few individuals, but the
practice can bury the rest of the company in costly inventory.
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In Search of the Holy Grail 11
Passing the Buck
Have you ever worked in a company where each division is responsi-ble for its own fiscal health and viability? Many companies operate
this way. Often, each division is referred to as a profit center. On
the surface, individual profit centers make sense especially if the com-
pany wishes to maintain the option of selling the profit center some
day in the future. After all, if a division isnt profitable, why keep it
around, right?
Well, its not that simple. Creating separate profit centers within
companies often motivates workers to do whatever it takes to ensuretheir division is profitableeven if their actions arent in the best in-
terests of the entire company. For example, a production plant man-
ager may need to run the assembly lines at maximum capacity in
order to be profitable, or to achieve an annual bonus. This means the
plant will make as many widgets as possible 24 hours per day. How-
ever, perhaps the market for widgets has declined and sales are slow-
ing. It might be best for the company to balance production with
demand to avoid lowering its retail price for widgets. Despite the ben-
efits to the company of curtailing production, the production plant
keeps on producing widgets to meet its div ision goals.
Another problem with running div isions as individual profit cen-
ters is transfer pricing. Transfer pricing occurs when two or more di-
visions within the same company are run as individual profit centers,
but work together to develop or deliver a product. Perhaps it is engi-
neering and production, or manufacturing and transportation. These
divisions often transfer money between them to pay for serv ices ren-
dered. While many profit centers operate this way, it often causesworkers to lose sight of the real customer. Employees often believe
their customer is another division within the same company.
Wrong! The only customer is the one who purchases a companys
products or services, the one that pays with actual moneynot theo-
retical currency. Until companies rectify this problem, overhead costs
will continue to rise, customers will continue to feel disillusioned,
and business divisions wil l keep passing the buck.
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12 Adapt or Die
The Search for Efficiency
To compensate for the major inefficiencies brought about by such growth,many companies have turned to a variety of business excellence programs
to help them operate more effectively. Over the last 20 years, businesses
have implemented a myriad of initiatives in an effort to achieve greater
efficiency.
These initiatives read like acronym soupTQM, BPR, TOC, ERP,
MRP, and on and on. To varying degrees, they all have helped businesses
improve efficiency and reduce costs. Yet each time companies have gone
through the time and expense, the elusive cure-all has eluded them. Too
often companies have perceived these initiatives as stand-alone solutions.
These init iatives have had mixed results. In most situations where such
programs have failed, the reasons come down to cultural, organizational,
and personal inhibitors. The barriers to change are too high and com-
panies cannot or are unwilling to make the shift. Often companies insti-
tute a fragmented solution that only addresses a part of the problem. They
tr y to find a piece of it to digest. In other situations, companies arent will-
ing to make the changes required to address the problem on a permanent
basis. Companies also seem to use technology as a sort of penicillin, in-jecting it where any problem lies and trusting that the cure will follow.
The decision to pursue these business initiatives is soundsuch ini-
tiatives generally represent the best thinking of the t ime, and often help
businesses to achieve significant improvements and provide a foundation
from which to build. But business-excellence initiatives do not go far
enough in todays economy, because they are focused solely on making
improvements within the four walls of the company. In the New Economy,
the question is no longer how effectively a company operates internally,but rather, how effectively it works with its partners, where the majority
of signif icant time delays now exist.
Following are examples of well-known excellence initiatives that have
helped businesses improve in the last decade:
Total Quality Management (TQM). A highly popular business ini-
tiative, TQM focused companies on the goal of delivering quality prod-
ucts and services to the customer while reducing manufacturing costs
by eliminating useless tasks. Originally meant to help manufacturers
produce consistently high-quality products, TQM preached continuous
improvement of internal company processes. Quality did improve, but
in most industries today quality has become a requirement and by itself
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In Search of the Holy Grail 13
When Change Is Good*
What do local phone giant Pacific Bell and automotive insurer Pro-gressive Insurance have in common? Both companies know that
change is in their best interests.
Struggling to cut costs and boost profits, Progressive Insurance
and Pacific Bell are among the hundreds of companies that have re-
made their corporations by embracing Business Process Reengineer-
ing (BPR), a business productivity initiative.
BPR is a process designed to increase efficiency and boost sales
through structural changes and solid planning. Companies sometimesseek quick fixes by attempting to use BPR programs to cut costs. How-
ever, companies that have successfully implemented BPR have done so
by improving their service to customers and by putting solid mea-
surements in place by which to evaluate their success.
For example, Progressive Insurance improved its service to its cus-
tomers, high-risk automobile drivers, by offering them 24-hour-per-
day services. It also offered them mobile claims programs in which
claims adjusters travel to accident sites to survey the scene and take
photographs, and on-site payment and towing services.
Like Progressive Insurance, telecommunications carrier Pacific
Bell undertook its own BPR program intending not merely to cut
costs, but also to increase benefits for its customers. Every time it con-
siders changing a business process, Pacif ic Bell weighs the costs and
benefits of doing so. The company calls this Process Value Estima-
tion. Pacif ic Bell measured its BPR successes by comparing its service
to customers before and after its BPR efforts. The company, which
continues to remake its core processes, has seen benefits in customersatisfaction and loyalty.
In short, change can be good for corporations, provided they
begin with measurable goals aimed at improving service for customers.
* Thomas J. Housel, Arthur H. Bell, and Valery Kanevsky, Calculating the Value of
Reengineering at Paci f ic Bell, Planning Review( January 11, 1994): 40.
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14 Adapt or Die
is no longer enough to differentiate a company and its products from
its competition.
Business Process Reengineering (BPR). Another popular business ini-tiative, BPR helped fuel the economic growth of the late 1980s and
1990s. BPR enables companies to signif icantly reduce costs, improve
organizational efficiency, and increase customer satisfaction by
streamlining their organizat ional processes. BPR initiat ives also help
remove some extraneous processes within companies and improve
business fundamentals. Now BPR needs to be taken to the next step as
companies develop standardized business processes with their trad-
ing partners. Theory of Constraints (TOC). TOC improves manufacturing effi-
ciency by identifying and reducing constraints or bottlenecks in the
production process. TOC focuses on the idea that all production
processes are interdependent, and that the speed of any system is dic-
tated by the slowest part of the process. Like BPR, TOC now needs to
be extended beyond the four walls of the company to help organiza-
tions reduce bottlenecks that occur when working with their trading
partners. Resource planning. Resource planning tools, including Enterprise
Resource Planning (ERP), Material Requirements Planning (MRP),
Distr ibution Resource Planning (DRP), and similar efforts, focus on
reducing inventory, transportation costs, manufacturing bottlenecks,
and other processes through improved planning. All of these init ia-
tives are capable of providing sustainable benefits, but there have also
been failures. Primarily, these initiatives were taken on as informa-
tion technology projects, and the process changes were never institu-
tionalized within the companies. With the speed of the new economy,
simply planning faster is no longer effectivecompanies must col-
laboratively plan with external trading partners.
Merger and Acquisition Fever
Many companies realize that doing it all themselves doesnt provide the
speed and opportunity needed to compete in todays economy. As a result,
they have turned to mergers and acquisitions.
Today, mergers and acquisition activity is at a fever pitch. You cant
pick up The Wall Street Journal, the Financial Times, or the Tokyo Yomiuri
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In Search of the Holy Grail 15
Shimbunwithout reading about another deal in the works. Whether it be
Time Warner Inc. merging with America Online Inc. in the communica-
tions industry to create the largest corporate merger in U.S. history, orDaimler-Benz AG and Chrysler combining two national assets in the au-
tomotive industry, mergers are taking place in sectors as diverse as media,
automotive, energy, telecommunications, paper, airline, financial ser-
vices, and soft drinks.
Mergers and acquisitions typically occur for one of two reasons: to
gain market share or to acquire technology, intellectual capital, or other
assets. Yet, they often come with a huge price tag, both monetarily and
culturally.
Mergers and acquisitions are painful because businesses often view
them as financial transactions and overlook the complex business -process-
engineering problems they present until well af ter the problems start to
occur. Integrating business functions such as human resources and cus-
tomer service can be hugely challenging. Combining processes, data, and
information systems can be both time-consuming and expensive.
Second, the cultural challenges of merging two companies are enor-
mous. Once a merger occurs, loyalties to the old company often prevent
workers from performing their best for the new one. Moreover, the man-agement cultures of the merged companies often collide, leading to irre-
solvable conflicts that prevent the merged company from functioning
A Marriage Loses Luster
The merger of America Online, the worlds leading Internet service
provider, and Time Warner, a major global media conglomerate, cre-ated a powerful new corporation with potential implications for the
New Economy. But like so many mergers before it, the AOL-Time
Warner marriage did not gain in capital value following its comple-
tion. In January 2000, when the board of directors of both companies
approved the deal, the combined market value of the companies stood
at approximately $350 bil lion. By May 2002, however, the market cap-
italization of AOL Time Warner was about $78 billion. The value of
the combined companies did not fall only because of the merger. Allcompanies in this business sector have experienced signif icant capi-
talization loss. In the case of AOL and Time Warner, the merger has
exacerbated an already difficult situation.
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16 Adapt or Die
effectively. Finally, theres the problem of customer loyalty. Customers
who were loyal to the old company may not be loyal to the new one, espe-
cial ly i f the brands and procedures they are accustomed to are replacedby those of the new company.
Joint Ventures
On the surface, joint ventures and other equity-based alliances would
seem to provide an excellent stepping-stone between a merger and a true
partnership. While mergers combine two existing companies, joint ven-
tures create a new company as an outgrowth of two otherwise separate
companies. For example, telecommunications giants AT&T and British
Telecom created a joint venture, dubbed Concert, to serve the worldwide
communications needs of multinational corporations. Similarly, Mi-
crosoft, the worlds largest software company, and U.S. television pro-
gramming company NBC created the MSNBC joint venture to provide
news and information and to blend the data-driven world of the Internet
with the more conventional medium of television.
Companies form joint ventures to create new products or services, orto give hidden business units the opportunity to operate and innovate
freely on their own. Joint ventures also allow companies to tackle new
markets without the constraining regulat ions and other obstacles facing
the parent companies.
However, joint ventures rarely provide the level of integration and co-
operation that the founding companies hoped for. For one, they require
an entirely new, independent management team. This new team takes time
to assemble and more time to reach peak performance. Even then, fewjoint ventures are ever truly autonomous, instead operating in the shadow
of their parent companies.
In addition, new products and services developed by the joint venture
can sometimes be tainted in the marketplace by their aff iliation with the
parent companies. For example, MSNBC has yet to turn a profit, and the
companys news operation suffers from ongoing concerns that Microsofts
involvement will harm MSNBCs objectivity with regard to technology and
other news. Concert was dissolved in October 2001 af ter annual losses of
$800 million and tepid demand.
For a variety of reasons, joint ventures offer some competit ive benefits
for businesses. However, they also can be problematic, and those chal-
lenges often outweigh the benefits.
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In Search of the Holy Grail 17
M&A, JV, divestitures, and all other forms of legal arrangements will
continue and are often not the root cause of the businesss diff iculty. How-
ever, to believe that through an essentially legal arrangement tremendousbusiness benefits will magically materialize has been proven wrong in the
past 20 years.
The State of Partnerships Today
In todays fast-paced economy, keeping all business processes under one
roof is too cumbersome and unwieldy. Business initiatives have helped,
but dont strike at the heart of the problem. Mergers and acquisitions
come with an enormous price tag, both logistically and culturally. Joint
ventures and other equity-based alliances often fail to provide the level of
integration and cooperation required for success.
So where is the Holy Grail that has eluded companies despite all of
their efforts? Its very simple, and it comes down to this: Businesses must
cooperate today to survive tomorrow. A companys success in the twenty-
first century economy will be determined by the relationships it develops
with its suppliers and customers.Like mergers and acquisitions, these supply chain partnerships help
companies to quickly acquire a technology, product, or market access they
dont currently have. With the ability to easily add and drop trading part-
ners as strategic needs change, companies can adapt to changing market
conditions much more quickly than is possible by keeping all their oper-
ations within the four walls of the company.
Such partnerships also present a way for companies to develop the
broader mix of offerings needed to meet the demand for personalizedproducts. In addition, they allow companies to strategically bundle prod-
ucts and services in ways that distinguish them from their competitors.
Over the years, companies have made strides in working with part-
ners along the supply chain. Some companies pursue linear supply chain
strategies, forming strategic buyer-seller relationships with their suppli-
ers and customers. In other cases, companies purchase materials from
suppliers through hub-and-spoke systems such as the public and private
exchange. Yet, as discussed in Chapter 2, neither of these partner rela-
tionships goes far enough in providing companies with the f lexibility re-
quired to play by the new rules of todays fast-paced economy.
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20 Adapt or Die
in customer demand when it takes weeks or months to learn about these
changes. These are just some of the issues companies could address by
working more closely with their trading partners.Second, until recently, the technology has not existed to allow com-
panies to form flexible, low-cost relationships with partners. Over the past
few decades, larger companies have begun communicating electronically
through direct links with their suppliers, but these linkages remain ex-
pensive to install and maintain. In addition to its expense, this technol-
ogy doesnt provide the flexibility needed to change suppliers if they are
later deemed ineffective or if market conditions change.
Today, the corporate partnerships that businesses commonly form
fall into two categories: point-to-point relationships, in which companies
communicate with each other one at a time, and one-to-many relation-
ships, in which a single company communicates simultaneously with
many of its suppliers and customers. Examples of point-to-point partner-
ships include linear supply chain relationships. Examples of one-to -many
partnerships include public and private exchanges. In many cases, these
partnership models are pure buyer-seller relationships. There are bene-
fits and shortcomings for each of these partnership models in a com-
mercial landscape where competit iveness often depends on reducing thetime frame from forecasting demand for a product to supplying that
product to customers.
Point-to-Point Relationships
One of the most basic ways to form partnerships with companies involves
simple point-to-point communications. These relationships typically con-sist of a series of commands by one company and a series of responses
from the second company:
Company A: Deliver the order to my main warehouse.
Company B: Yes, the order will be fulf illed tomorrow.
Communication occurs between two companies at a time, the infor-
mation exchanged is limited, and the company making the purchase viewsthe relationship as a pure buyer-seller exchange. A buyer-seller relation-
ship in its simplest form occurs every day when people make a purchase.
They know what they need, what they want, how much they want to pay
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Seeking Partners for Greater Competitive Advantage 21
The Role of Technology in
Point-to-Point Relationships
Today, many companies have formed point-to-point relationships with
their suppliers and customers in the supply chain through the use of
standard-based technologies such as electronic data interchange
(EDI) and extensible markup language (XML).
These technologies have enabled companies to more readily com-
municate with partners, but too frequently merely automate manual
tasksand in some cases can even increase the cost of doing so
without improving the underlying business processes. Fundamentally,EDI and XML facilitate one-to-one relationships between partner
companies, rather than fostering broader collaborative partnerships
that will lead to adaptability.
Electronic Data Interchange
EDI replaces paper documents with electronic transact ions. By send-
ing standard messages, a company can communicate with its suppli-
ers to coordinate shipments, check project status, confirm prices, or
exchange other standardized information.
Although EDI saves companies time by automating simple inter-
actions they once accomplished by phone or fax, on its own it does
not provide businesses with the f lexibility needed to create dynamic
partnerships. EDI simply standardizes the information passing be-
tween the two companies. The unique processes of each company that
uses the information remain the same. Each new EDI interface costs
thousands of dollars, takes months to implement, and is difficult to
maintainmaking EDI the antithesis of flexibility and putting thissolution out of the reach of smaller companies.
Once a company and its suppliers have invested in this technol-
ogy, it is costly and time-consuming to change suppliers when they
are ineffective or when market conditions change. Moreover, the ten-
dency of companies to customize EDI makes it expensive and cum-
bersome for a supplier to work with more than one company at a t ime.
For example, if a supplier serves Wal-Mart , it may need to implement
completely different EDI solutions to also work with Kmart and Tar-get. As a result, EDI has not been widely adopted.
(continued)
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22 Adapt or Die
and they go buy it. Companies engage in the same practice, with each
transaction as a stand-alone entity.
The Linear Supply Chain
The linear supply chain is a set of point-to-point, buyer-seller relationships.
Participants in the linear supply chain communicate directly with the sup-
pliers from whom they buy and the customers to whom they sell. The rela-
tionships participants form with their suppliers focus primarily on price,
the ability to deliver, and the stability of the supplier relationship.
The Role of Technology in
Point-to-Point Relationships (CONTINUED)
Extensible Markup Language
XML is a set of Internet standards that provides a common way of
identifying data and makes uniformor standardizesthe exchange
of data between different computer systems and otherwise incom-
patible technologies.
XML should significantly reduce a portion of the cost of elec-
tronic point-to-point communications because it is based on common
and widely accepted standardized Internet technologies. Some ana-lysts predict that XML-based technologies will emerge as a more ef-
fective way to link applications between business partners than EDI
because XML has been widely embedded in most current business
software, making it available to more companies. Indeed, XML will
likely see wider acceptance and deployment than EDI as a result of
its lower cost and natural f it with the Internet.
Today, many software vendors are adding XML support to their
products. This is very promising. XML holds the opportunity of fu-ture benef its provided it is not implemented by companies using EDI
techniques. However, XML comes with its own set of challenges. Chief
among these is the fact that numerous XML specif ications, vocabulary
subsets, and developer-defined variations exist, making its use frag-
mented. In addition, many companies have failed to tighten their
business processes before implementing XML. As a result, the use of
XML has simply mechanized tasks companies used to perform man-
ually without helping them to strengthen their business processes.
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Seeking Partners for Greater Competitive Advantage 23
A classic supply chain is a sequence of companies, each passing in-
creasingly finished materials to the next in an ordered sequence (Figure
2.1). In a linear supply chain, information passes from the retail or customersales point back to the raw materials suppliers as if stepping down the
rungs of a ladder. Materials f low in the opposite direction, from the pro-
cess companies to the discrete companies to the consumer packaged
goods companies to the retailer who finally sells it to the consumer. Ma-
terial inventories build up between supplier and customer at each rung on
the ladder.
Some linear supply chains can be extremely large and complex, with
literally thousands of companies working to deliver products to the cus-tomer. For example, the typical automaker has direct and indirect rela-
tionships with potentially 30,000 suppliers. The typical supermarket
works directly and indirectly with 10,000 to 15,000 suppliers.
Linear supply chains offer a host of benefits compared to growing
from within. By working with a wide range of suppliers, for example, com-
panies can ensure the materials they need are available when they need
them. In addition, they can make sure they are getting these supplies at
consistent high quality and at competitive cost, and pass this quality and
low cost on to the customer who purchases the finished product or service.
Despite these benefits, the linear supply chain comes with some major
drawbacks. First, information is communicated in a point-to-point fashion
between two companies at a time along the supply chain. This leads to
Figure 2.1 The Linear Supply Chain
In the linear supply chain, information about customer de-
mand is passed from one company to the next in a sequen-tial assembly line format. Information about how much
inventory is needed becomes increasingly distorted as it is
passed from the customer who purchases the final prod-
uct back through the supply chain to the supplier of raw
materials.
Distortion Distortion Distortion DistortionDistortion
DistributionWarehouse
RawMaterial
ComponentSupplier
PrimaryManufacturer Retailer Customer
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24 Adapt or Die
significant time delays in fulfilling customer orders and in responding
quickly to changes in customer demand and to distortion of the demand
information due to the information bull whip effect.Second, the sequential transfer of information within the linear supply
chain leads to the bullwhip effect, in which information becomes expo-
nentially distorted the farther down the supply chain a company is from
the customer who purchases the finished product. Not knowing exactly
what the customer buying the finished product needs or wants, companies
tend to order more from their suppliers just in case. In turn, the suppli-
ers order more from their suppliers, just in case, and so on down the line.
The farther back through the supply chain an order has to travel, the
more the order becomes distorted, creating the uncertainty that causes
companies to accumulate greater quantities of inventory. The result is that
companies throughout the linear supply chain end up accumulating more
inventory than they need to serve the customer, and the more inventory a
company carries, the greater the working capital it needs to operate.
Third, companies within the linear supply chain have limited visibil-
ity as to whats happening elsewhere in the supply chain. Think of a str ing
of sled dogs. For a sled dog in the middle of the team, the view never
changes. All it can see is the dog right in front of it, and all it can do is
The Bullwhip Effect
Remember playing the telephone game as a child? The first child had
a message, which he whispered into his neighbors ear. The second
child heard the message, and whispered it into his neighbors ear, and
on and on from child to child. By the time the message reached the
last child, it was completely distorted.Similarly, within the linear supply chain, information is commu-
nicated from supplier to supplier all the way back down the line from
the customer who purchases the final product to the supplier of raw
materials. Each supplier along the way makes decisions about produc-
tion and supply that affect the decisions of its suppliers. By the time
an order reaches the raw materials supplier, it has become increasingly
inaccurate, leading the supplier to hold much more inventory than is
needed. This phenomenon is known as the bullwhip effect.The effect is analogous to cracking a whip. When the whip is
swung, the further away from the handle the wave travels, the faster
the tip of the whip reacts. Supply chains operate in a similar fashion,
with perhaps more painful results.
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26 Adapt or Die
happens if the farmer experiences a drought? Or if the flour mill cant
produce enough flour? Any glitch in the process affects on-time delivery
of wheat bread to the retailer. What happens if theres a sudden marketshift? Say a new study finds that millet prevents cancer, and suddenly
customers are buying bread made with millet instead of wheat. By the
time this information is communicated all the way through the supply
chain to the farmer, inventories of wheat bread, wheat, and the packag-
ing may have stacked up to unnecessary levels, causing everyone in the
supply chain to lose revenue.
In addition, the information passed within the supply chain is lim-
itedtypically, it takes the form of an order from one company to its sup-
plier. For example, the flour mill does not receive information regarding
how well breads that use its wheat flour are selling. Nor does it know
whether customers prefer breads with dif ferent types of flour over the one
it is supplying. Instead, the distributor requests delivery of wheat f lour by
a specific date. Its a pure buyer-seller relationship. With limited infor-
mation, the flour miller can only respond reactively to the bakers requests
for flour and has little ability to help the baker proactively promote the
products and new brands that would create more demand for both of their
products.In short, the linear supply chain is not adaptable in either the short
or the long term. The nature of its relationships limits the ability of par-
ticipants to react to sudden change, and the nature of the information
exchanged limits their ability to plan strategically.
One-to-Many Relationships
With the advent of the Internet, some companies have begun working
with suppliers and customers in online marketplaces. Chief among these
models are the public and private exchange, in which bids, requests for
proposal (RFPs), and other information are posted online. Unlike the lin-
ear supply chain, in which delays occur as information is communicated
sequentially from company to company, online exchanges allow commu-
nication to reach all participants simultaneously, quickening response
times and significantly reducing the bullwhip effect.
This effect is observable as companies internally collapsed multiple
and disparate data and process models into an integrated model. This
has been one of the key benefits of existing ERP implementations. It
is anticipated that online exchanges will have a similar effect across
companies.
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Seeking Partners for Greater Competitive Advantage 27
Public Exchanges
Public exchanges offer a way for businesses to advertise their buying needsto the world, and for suppliers to bid on these products and serv ices. This
bid-and-respond system is touted as a way for corporations to attract new
suppliers and customers by linking buyers and sellers that had never pre-
viously worked together (Figure 2.3).
Figure 2.3 The Online Exchange
The online exchange operates like a centralized hub
through which all information must pass. Every message
and every relationship is like a spoke that must be directed
through this hub. In general, the online exchange has been
most used for buying and selling commodity products. The
emerging exchange implementations are allowing for ever
more complex products to be collaboratively designed and
developed via exchanges.
Customer
Reques
tR
esponse
ExchangeExchange
Req
uest
Respo
nse Req
uest
Response
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28 Adapt or Die
Public exchanges initially gained popularity by promising to stream-
line industr ies and cut billions of dollars in costs by creating a public mar-
ketplace from which to buy and sell products, jointly design products, andcollaborate in real time. By the end of 2000, venture capitalists had in-
vested $5 billion in more than 360 business-to-business efforts, accord-
ing to Venture One, a San Francisco-based venture capital market-
research firm.1
But after investing heavily in public exchanges, businesses now real-
ize that they benefit little from opening their bids to all companies be-
cause many of these companies arent qualif ied as part icipants. Many of
these companies cannot make the highly specialized products or supplies
other businesses need, so in effect the pool of potential partners is not as
large as anticipated.
In addition, public exchanges emphasize pr ice, making it diff icult to
win bids based on other factors such as quality or speed of delivery. Be-
cause of this, many companies are hesitant to participate in public ex-
changes, and customers often find inconsistent quality, which leads to
higher production costs and higher variability in their end products. Sell-
ers also have concerns with being disintermediated from their customer
and having their products become commodities.In addition, security of information has been a concern for all par-
ticipants, as well as the lack of value that public exchanges bring for the
price of each transaction. As a result, although some stil l exist, public ex-
changes have never taken off. Many marketplaces have entirely failed or
have not met their business objectives, and nearly 120 of them have been
shut down or acquired, according to Deloitte Consulting.2
Private Exchanges
Although public exchanges never quite delivered on their promise, a vari-
ation of this medium has quickly emerged in its place: the private ex-
change. Private exchanges offer companies greater control because they
are owned and operated by one company, which then provides access to
the exchange to selected suppliers and customers. Rather than attract new
customers and suppliers, businesses use private exchanges as a way to work
interactively with suppliers and customers that they select. In addition to
the automation of buying and selling, private exchanges provide a way
for participants to interactively manage inventory, production schedules,
shipping schedules, forecasting, and sales.
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Seeking Partners for Greater Competitive Advantage 29
Dozens of companiesincluding Hewlett-Packard, Dell Computer,
IBM, and Wal-Marthave formed private exchanges, and many com-
panies have reaped benefits from doing so. For example, by linking about60 parts suppliers through a private exchange, Dell tr immed inventory in
its factories to the point where parts are held on average for just six hours
before assembly, down from 15 hours the year before.3 Manco, an Avon,
Ohio-based maker of specialty adhesive products, reported saving 28 per-
cent in distribution costs and 18 percent in freight costs by participating
in a private exchange headed by Ace Hardware.4 IBM saved $400 million
in 2000 by moving its procurement processes with 20,000 suppliers to a
private exchange.
However, the private exchange also has its limitations. It operates l